Marginal Costing

O S T
RGI N AL C
MA
Amount at any given volume of output
by which aggregate costs are changed if
volume of output is increased or
decreased by one unit .It relates to
change in output in particular
circumstances under consideration.
Meaning of marginal cost

Difference Between Absorption costing &
Marginal costing
 All costs fixed &variable are included  Only variable cost are included .fixed
for ascertaining the cost. cost are recovered from contribution.
 Different unit costs are obtained at  Marginal cost per unit will remain
different levels of output because of same at different levels of output
fixed expenses remaining same. because variable expenses vary in the
 Difference between sales &total cost is same proportion in which output
profit. varies.
 A portion of fixed costs is carried  Difference between sales and marginal
forward to the next period because cost is contribution and difference
closing stock of work -in -progress & between contribution and fixed cost is
finished goods is valued at cost of profit or loss.
production which is inclusive of fixed  Stock of work- in-progress and
cost. In this way costs of a particular finished goods are valued at marginal
period are vitiated because fixed cost cost which does not include fixed
being period cost should be charged to cost .Fixed cost of a particular period
the period concerned & should not be is charged to that very period and is
carried over to next period . not carried forward to next period by
including in closing stock .Being so
,cost of a particular period are not
vitiated.
Difference Between Absorption costing &
Marginal costing
 The apportionment of fixed expenses  Only variable cost are charged to
on an arbitrary basis given rise to products .marginal cost technique
over or under absorption which does not lead to over or under
ultimately makes the product cost absorption of fixed overheads.
inaccurate and unreliable.  The technique of marginal
 Absorption costing is not very costing is very helpful in taking
helpful in taking managerial decision managerial decisions because it
such as whether to accept the export takes into consideration the
order or not ,whether to buy or additional cost involved only
manufacture ,the minimum price to assuming fixed expenses
be charged during depression etc. remaining constant.
 Costs are classified according to  Cost are classified according to
functional basis such as production the behaviour of cost i.e. fixed
cost ,office and administrative cost cost and variable cost.
and selling and distribution cost.  Cost ,volume and profit
 Absorption costing fails to establish relationship is an integral part of
relationship of cost volume and marginal cost studies as costs are
profit as costs are seldom classified classified into fixed and variable
into fixed &variable. costs.
LIMITATIONS
 Technical difficulties.
 Time taken for completion of jobs is not given due
attention.
 Less effective.
 Balance sheet will not exhibit true and fair view.
 Problem of apportionment of variable cost still arises.
 Difficulty to apply in contract or ship building
industry.
 Does not provide any standard.
 General reduction in selling price and thus losses.
U M E
–V O L
COS T T
R OF I
–P S IS
AL Y
AN
Assumptions
 Fixed cost remain static & marginal costs are
completely variable at all levels of output.
 Selling prices are constant at all sales volume.
 Factor prices are constant at all sales volume .
 Efficiency and productivity remain unchanged. In a
multi product situation ,there is constant sales mix at
all level of sales.
 Turnover level is only relevant factor affecting cost
& revenue.
 Value of production is equal to volume of sales.
ELEMENTS
 MARGINAL COST EQUATION

 CONTRIBUTION MARGIN .
 PROFIT /VOLUME RATIO .
 BREAK EVEN POINT .
 MARGIN OF SAFETY.
MARGINAL COST
EQUATION
SALES=VARIABLE COSTS
+FIXED EXPENSES+P/L
OR
S-V=F+P/L
CONTRIBUTION
MARGIN
CONTRIBUTION =SELLING PRICE –
MARGINAL COST
OR C=F+P/L
OR C-F=P/L
PROFIT /VOLUME
RATIO
CPV=CONTRIBUTION /SALES
OR F+P/L/V.C+F.C+P/L=[F+P/S]
OR S-V/S=CHANGE IN PROFITS OR
CHANGE IN SALES
BREAK EVEN
POINT
B.E.P=FC/P/V
OR TOTAL FIXED EXPENSES/S.P PER

UNIT-MC PER UNIT
OR TOTAL FIXED
EXPENSES/CONTRIBUTION PER UNIT
MARGIN OF SAFETY
MOS=PROFIT/P/V RATIO
DIFFERENCE BETWEEN
CONTRIBUTION &PROFIT
 Includes fixed cost &  Does not include fixed
profit . cost.
 Based on marginal cost  Based on common man
concept. concept.
 Contribution above break
 Profit is expected only
even contributes to profit.
 Contribution analysis
after covering variable
and fixed cost.
requires a knowledge of
 Profit does not require
break even concept.
any such concept.
APPLICATION OF MARGINAL COST &
COST, VOLUME & PROFIT ANALYSIS-
 COST CONTROL.
 PROFIT PLANNING.
 EVALUTION OF PERFORMANCE.
 DECISION MAKING.
 FIXATION OF SELLING PRICE.
 KEY LIMITING FACTOR.
 SUITABLE PRODUCT MIX.
THANK-YOU

Marginal Costing

Uploaded by

Copyright:

Available Formats

Marginal Costing

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Marginal Costing

Uploaded by

Copyright:

Available Formats

O S T

Meaning of marginal cost

 MARGINAL COST EQUATION

OR TOTAL FIXED EXPENSES/S.P PER

You might also like